Mercadolibre Inc. (NASDAQ:MELI)
Participate in Credit Suisse Annual Technology Conference Call
November 27, 2012 12:00 pm ET
Pedro Arnt – Chief Financial Officer and Executive Vice President
Stephen Ju – Credit Suisse
We’ll go ahead and get started. Good afternoon everybody. It’s Steven Ju from the Credit Suisse Internet team. Very excited to have with us Pedro Arnt, CFO of Mercadolibre. Welcome Pedro and thank you for making a long trip out.
So for those of us in the room, who are not very familiar with the Mercadolibre story, if you can kind of give us the quick overview.
Sure. Absolutely. We run the leading e-commerce platforms in Latin America, presence in 12 markets across the region, and initially started with a very similar business to e-base running marketplaces and has evolved since and the strategic vision for the company is to become a platform for online trading for merchants.
So today in addition to the core marketplace business that does about 70% of our revenue, we also have a product called MercadoPago which is in essence very similar to PayPal and then newer business units that revolve around online advertising, capabilities for merchants, software-as-a-service model for setting up your own web stores online through our technology and very deeply integrated with the other portions of the ecosystem.
And even more recently also, technology solutions for online shipping and fulfillment management both for purchases carried out on the marketplace and off the marketplace. So increasingly trying to broaden the scope of the services we offer to address all the needs of any merchant who wants to start selling online.
I mean your stock has become one that’s quite controversial as of late. The long term message has been I guess 25% to 35% growth rate for e-commerce in the region and the aspiration I think for Mercadolibre to grow at excess of those regional rates. Now I think what’s kind of I’m asking your growth rate right now is you guys start to hit the tough comps right, that have been generated when you guys rolled out a new world platform in the third quarter of 2011. So presumably than as you just entered to be a tough comp, so the next three quarters are also tough comps as well. So what’s your view point in terms of what your growth rate might look like back over the longer term? We still feel that it’s within the 25% to 35% range and you outperforming that range?
So I think Forestry came out recently with their latest projection for e-commerce in the region and I think over the next five years we are probably talking at CAGR that’s more in the high teens, low 20s and the 25% to 30% was the last five years. We’ve always said that given the position we have the leader in e-commerce in each of the markets where we operate, the growing ecosystem of complimentary properties, we aspired to be growing above the market and if we are not we have some tough questions to answer. I think we still stand by that affirmation.
You mentioned the comp issues, certainly our business has decelerated in the latest reported quarter and that’s something that we had stayed quite ahead of and had been mentioning to investors way back as early as Q1 of this year that there were some very tough comps in the back half of the year and it was important for people to be cognizant of that.
But I think additionally and perhaps even more importantly, there is something else going on which I think long term we are extremely optimistic about, but does generate a short term transition period and that’s also part of what we are seeing in the back half of this year and its that we are being to address certain portions the buying flow on the marketplace that marketplaces had historically not really addressed namely payments and shipping. So we are getting increasingly involved with those two parts of the transaction.
And long term I think that begins to built some very solid competitive advantages and that if you can offer a great buying experience not only around what has been our core value proposition, selection and price, but you can also address the convenience portion of buying by having integrated payments that are seamless and that flow through us. And then by participating in the shipping and delivery portion of the transaction, you begin to close the loop around the consumer.
Now the tricky piece of it, as you begin to do that, you are also changing by your behavior we thought buyers over the last 12 years that the payments part and the shipping part was something that to a large degree they could settle on their own with the merchant regardless of the complexity of lack of convenience that caused. Now that we are bringing that more and more into one integrated seamless flow there is some education of our buyers and some changes in buyer behavior that we will carry out that have some short-term impacts on how the platform is converting.
Stephen Ju – Credit Suisse
So it seems like to me that you are talking about taking away some of the frictions of the business mainly around payments as well as logistics, the logistics part of it first. So I think in the past you’ve talked about perhaps coming up with some sort of the fulfillment solution for some of your seller base and may be partnering up with logistics or distribution partners regionally what is the status of that initiative and you can [put] forward in that regard?
So there is two phases and two major initiatives that we want to pursue around shipping. Right, and the first one doesn't revolve around warehousing and shipping or so, so it's simply revolves around integrating the buyer, the seller and the shipping carrier with our marketplace and our technology, so that we are able when you're buying something on the marketplace to set the shipping cost based on our negotiated deals, which are lower than those of our sellers on an individual basis so we generate value to sellers by lower price.
Stephen Ju – Credit Suisse
Sort of collective marketing.
Stephen Ju – Credit Suisse
Because we know where the buyer and the seller or we can optimize the carrier to use and the cost, and then because we’re evolved in that shipping transaction, we can issue the tracking numbers, we can tell the sellers to simply print the label, smack it on the box, have the carrier pick it up and deliver.
And additionally we are involved in that transactional all-time, so we can better serve our buyers in terms of answering where their packages are, we know if the package was deliver or wasn't. So without ever touching the inventory you are able as the marketplace to offer buying experience that is more and more similar to the one you have when you buy from a natural retailer. That's phase 1, that's the technology platform, we’ve launched in Brazil and that we're now working on gaining traction and adoption and eventually rolling out to other countries.
The second part is do we want to get involved in the actual fulfillment in warehousing on behalf of our sellers. And the answer there is that we believe the long term there probably is value to add to our sellers by taking on some of their inventory and warehousing it and fulfilling it for them, and we also recognized that inventory that you are fulfilling yourself, you can probably do a better job from a buyers perspective and predicting when it will be delivered and the reliability of that delivery.
So what you likely see as to do some time next year is to run a very small scale pilot program as you mentioned with the partner in Brazil were essentially we will white label, they will white label the solution for us that we will offer to a select number of sellers in Brazil, and then see how that resonates with those buyers and sellers what the economics of running that are? How efficient it is to run that in a place like Brazil whether still are infrastructure limitations around shipping and logistics, and then be able to give you a more clear long-term view on what our decision is regarding whether we need to own those warehousing and physical world assets whether we continue to do it with the partner or whether we’re better of not even getting involved.
Stephen Ju – Credit Suisse
Everything that we are hearing about the Brazilian market right now is that and companies are in general continue to see extraordinary growth and in this environment it access to talent can be progressively more difficult, I think your company has been a net exporter of technology out of Argentina and into Brazil so you have not been as affected, but how is your attitude for [scouting] for talent and engineers and personal changed over the years especially now given the change in political landscape in Argentina?
So it certainly has evolved as the Internet as continue to grow and it has become increasingly competitive to source the best engineers in the region we have gone from a single development center and the single market and which we would look for engineers, which was the city of when the side is initially to opening up development centers in other states in Argentina that had very good technical Universities and more recently to even start sourcing our engineers, and our development centers in other countries. So we have the center that we opened in Uruguay over the last six months, another one that we opened in Venezuela, we opened one in San Francisco at the beginning of the year. And I think you will continue to see us doing that to broaden the talent pool from which we can hire engineers.
The other piece is that, if you look at Mercadolibre, this is the preeminent consumer internet brand in the region. I think we do have an advantage over most other companies and that besides the fact that we can’t grant pre-IPO equity, it is probably by far the most exciting place for an engineer in Latin America to be able to work at, because essentially you are working on the technology of the leading internet company in the region. So we are fairly successful in getting engineers to accept our offers when we make it to those engineers.
Gotcha. I think the change in political climate has also signaled for you guys a change in (inaudible) in terms of M&A. So if you can elaborate on that and your changes there?
Yeah. So I think what you are referring to just to give it a little bit more of context and even asked this very previous question, I don’t think it applies as much to the engineering talent because our commitment is to have the best engineers regardless of what country they are in and the implicit cost of operating under that country.
But when you look at other operating expenses and overhead, I think it is true that there is a move away from Argentina towards Uruguay towards Venezuela towards some other countries because recently instituted capital controls in Argentina make it less convenient to have as much of our corporate overhead in Argentina than it did in the past. So we continue to have large offices there. We continue to be fully committed to that market, but from a corporate overhead perspective, we are beginning to move positions away from Argentina towards Uruguay and other countries.
And I think the M&A comment is, when we are asked the question regarding what will you do with the profits that are retained in Argentina and there are subject to Argentine capital controls, what we said is we are more comfortable with those capital controls in Argentina than we are in Venezuela because we believe Argentina is a country where there are technology assets that we could acquire, that become accretive to the rest of the business, there are very good software boutiques, there are some e-commerce companies that are small but had some talented people or some good IP that we could deploy that capital towards buying.
Venezuela is a different case and that you have similar capital controls and you don’t really have assets that we would consider interesting. So you could see us get more acquisitive in Argentina as a way to deploy that capital something that we couldn’t say the same about in Venezuela.
Your take rates for the last two reported quarters have been continued to edge higher and I know previously and on your commentary around the take rate has been its more of a function of GMB, you don’t really control for but I think in the last quarter (inaudible) for the first time ever willingness on I think on Mercadolibre, MercadoPago just start scaling up I guess sort of the fee that you were charging to sellers. So if you can elaborate on that in terms of is it going to be a variation of the tier pricing or is it just an outright pricing fees. You can elaborate?
So there are some trends around the monetization of the business that I think were fairly comfortable thing, this is what you should expect going forward right. The first one is and I had mentioned at the beginning, my introduction on the company that we are increasingly a complete ecosystem of e-commerce solutions and from a monetization perspective that has consistently driven our take rate up because some of these complimentary businesses to the marketplace whether it be the classified businesses, the payments business, the advertising business are all growing at a faster pace than the core marketplace. They are all performing tremendously well. So these are all additional revenue streams in monetization opportunities that have emerged in addition to the marketplace.
So when you look at our consolidated take rate, it has consistently been going up mainly driven by the increasing strength of these new business units. Now, and even when you look at the core marketplace itself as we overlay these additional services more transactions being settle through payments, that are shipping in logistic solutions. Additional ways to merchandise your listings on the marketplace and to better position your listings on search results. What we see is a greater ability to increase prices on our sellers because we are delivering greater value to them and drive the core marketplace take rate up and that has been happening over the last few quarters.
Now having said that, I think we continue committed to the strategy of maintaining the overall pricing levels on our marketplace much lower to what we see eBay take rates in the U.S., or Amazon take rates in the U.S. because we still think this is very early days. For us it’s still more about gaining market share and capturing new entrants, and I also think that as long as we can keep these prices relatively low, you invite less new entrants into the space.
And I think your platform historically has been fairly consumer electronics. For the years you’ve given particular focus on some of the other verticals like apparel. So just on a mix basis as you look forward, apparel was a high margin category versus consumer electronics, is there an opportunity there as you try to get additional share in those other verticals that carry higher margins for their take rates to succeed much higher.
So certainly, yes, I mean in all fairness one I think self inflicted mismatch on our marketplace is that because we started mainly retailing consumer electronics on behalf of our merchants that the features and the functionalities and the way we run the business was very much thought out for the sale of consumer electronics. And if you look at our numbers today, we continue to be somewhat underweight versus the e-commerce market in the region. Some of these newer categories like apparel, home and garden, the mom and children demographic.
So one of the things we are working on diligently is, how do I start verticalizing some of these categories, so I stop under indexing them and at least began to be equal way what those categories are overall in the market. And we’re being successful in that transition, if you look at consumer electronics, today they already represent less than half of our overall GMV whereas two and half, three years ago is more than 60%. So that shift is occurring.
And to your point around take rates another thing we've done and we can certainly alter going forward is, we don't price the different categories in a way that reflect the actual margin structures as some of our U.S. counterparts do. So we charge you the same commission rate in CE where obviously our merchant’s margins are very thin as we do say the antics category where merchant’s margins are very large.
So an added area for opportunity longer term as we could get more sophisticated and start pricing the categories in accordance to the underlying margin structures of those categories. Now the reason we’ve chosen to not do that is, because we think that in the earlier days of the Internet simplicity and conveying the message to merchants and understanding what the cost of selling on the platform continues to be more important than our ability to maximize the monetization so that's something that we’ll probably continue to push back a few more years.
Stephen Ju – Credit Suisse
So, why do we open it up to investors in terms of questions?
I just had a question about how the overall growth environment in the different countries impacts your business. Because you’ve seen Brazil overall the GDP growth has slowed pretty significantly, does that really important for your business or is the dynamic just different enough that not really that relevant?
So, we always say in this continues to be the case is the secular trend behind commerce moving from off-line to online and growing number of users moving online for the first time continues to be by far much more significant driver then what's happening at a macro GDP growth level. So I think the drivers of our business are much more structure around what's happening with broadband deployment and broadband adoption penetration of the Internet, then if Brazilian GDP will grow 3% or 2% next year.
I don't want to say that macro was a relevant, but it's certainly is a lot less relevant than the secular trends and metrics and even more important execution. So when you have such favorable tailwind from a secular trend, it really all boils down to execution. The quarters where we've grown 15 percentage points, 20 percentage points above the market have almost always coincided with specific launches or execution hits, the quarters where we've underperformed the market have almost always been because we met something up, and I think that will continue to be the case for a while.
In terms of the deployment of new world, I mean as a major undertaking for you and I'm just wondering if the data set is robust enough for you to be able to start building on the shopper model for all of your buyers and hence build out what is equivalent to I guess Amazon to recommendation engine to help merchandise products to your buyer base?
So I think the honest answer there is both in the category of our usage of the data we have, and the recommendation engines, there is a lot of opportunities that we need to address, and it's not top of our priority right now, not because there is an huge opportunity there, but simply because I think when there are so much growth across the board for us we need to be very disciplined about what we’re focusing on and big data right now isn’t a big one. There is something that’s related to this and we continue to work on and we had made some interesting advances which is moving to a catalogue driven listing model rather than a listing model, which is a typical challenge for marketplaces versus retailers.
We have made significant strides around catalogue-based navigation in certain key categories and that improves the ability of our recommendation engines to know that you just bought and iPad, so I can cross sell and iPad case three or which is something we couldn't do in the past. So but I think the short answer is there is a lot we can do around data that we're not doing that's probably 2014 just because we need to prioritize all the opportunities we have.
Mobile as a growth factor. What percentage of GDP, GMV is it for you right now? What do you think and can get to do you think Brazil as well as South America as a region could exhibit higher mobile GMV over the longer term versus some of the other countries around the world?
So mobile far us has been one example of very solid execution and results that have exceeded our own expectation, so we said I think in the last quarterly call that mobile has already around 5% of our GMV, which is significantly more than we start it would be less than a year after launching our mobile apps, so the traction there is tremendous.
Now having said that most of that is still existing users that now have a more [ubiquitous] use of Mercadolibre it's not additional users, and I think the real potential for mobile in Latin American your question, I think alludes to that is when you begin to be able to access segments of the population is part of your addressable market that will never have a desktop or wont have an office computing that they can access the broadband on. That’s now what we're seeing yet, I think that's really when the promise of mobile kicks in, and that might still be one or two three years away where the mobile transactions are accretive in terms of who is carrying them out and not just the number of transactions that are being carried out.
But as a platform now you walk, you set up to deliver that shopping content no matter what this be it is?
Absolutely. On the marketplace business certainly and multi-OS, so android, iPhone, Windows, RIM, blackberry which is still relevant in some of our countries absolutely MercadoPago slightly behind, but working on that and should close the gap very quickly. And in some other markets we haven’t disclosed which ones, but some of the relevant markets mobile GMV is actually low double digits or low teens, so it's very significant for some of our countries.
Stephen Ju – Credit Suisse
Thanks Pedro, thanks very much. I think we're out of time.
Thank you and thanks everyone.
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